Ecuador's new government proposes reforms to country's oil industry

Sep 18, 1998 02:00 AM

Ecuador's new government has moved swiftly to propose reforms to the country's oil industry which could double oil
output in 4 years if voted through the Congress of Latin America's third largest oil producer.
Since taking office, investors are already breathing easier since President Jamil Mahuad appointed Patricio
Rivadeneira to head the Energy Ministry and Ramiro Gordillo as president of state oil company Petroecuador.
Both men are well-qualified engineers with experience in the state and private sectors.
The new team has moved swiftly to address the private sector's main gripe -- the lack of pipeline capacity to take
oil produced in the remote Amazonian jungle over the Andes to export on the Pacific coast.
Ecuador produces about 380,000 bpd of oil, with the state producing about 300,000 bpd. Current pipeline capacity is
about 390,000 bpd. The country's main pipeline is currently running at its full capacity of about 340,000 bpd.
A secondary pipeline to Colombia can carry about 50,000 bpd but frequent bombings by rebels often render it out of
service. So any increase in production would have to be matched by an increase in transportation capacity.
"Ecuador could produce 650,000 bpd easily in 3 or 4 years, but it needs $ 800 mm investment -- $ 400 mm in a pipeline
and the rest in field development. That money has to come from the private sector because the state doesn't have it,"
said former Energy Minister Fernando Santos.
Analysts say building a new pipeline would be better because it will allow Ecuador to separate its heavy and light
crude oil streams, bringing efficiency and marketing benefits.
"We have had these promises in the past and nothing has come to fruition, but there seems to be an air of
co-operation between the government and foreign operators which is very encouraging," said a regional analyst.
Harvard-educated President Mahuad must now push through Congress plans to reform crisis-hit Petroecuador and extend
the reach of private capital inthe sector.
The changes will give managerial and financial autonomy to the indebted Petroecuador, allowing it to make its own
budget.
Petroecuador will be also able to sign joint-ventures with the private sector to raise output in fields previously
reserved exclusively to the state.
"The proposed changes would go 85 % of the way to getting Ecuador on its feet and into the 1990's before the decade
is over," said John Wright, president of Canada's Pacalta Resources, a private sector oil producer.
Current investors in Ecuador's oil industry say it could pump significantly more if the private sector was encouraged
to help.
Having made 2 new hydrocarbon discoveries recently, Pacalta alone could finish the year at 3 times its current 26,000
bpd production if more pipeline capacity was available, Wright added.
Since the idea of adding new export capacity was first proposed over 5 years ago, Ecuador has been incapable of
seeing through to completion any of the several projects proposed. The last idea was to expand the SOTE pipeline,
which now carries 90 % of the country's output to the Pacific coast for export.
"One of the first declarations of the new minister was that the government was abandoning its plan to increase the
capacity of the old pipeline and would let private companies build themselves a new pipeline. This created a very
good impression with the oil companies," said Santos.
Private oil operators, including Pacalta, Arco, Occidental Petroleum Corp. and Argentina's YPF have agreed to make a
firm proposal to the government by March next year.
Company executives were cautiously optimistic that the new plan will fly, although they are aware that conservative
elements in Ecuador still resist the presence of more foreign, private capital in the mainstay of the national
economy.
The new administration has also moved to calm the waters in the remote oil producing region in the east of the
country, where conflicts between indigenous Indians and oil companies have led to somekidnapping incidents.
"The previous government did not want to get involved, but the new administration is talking to the communities and
the companies to get the rules sorted out," Santos said.

On the exploration, production and development side, reforms will allow Petroecuador to sign joint ventures with
outside investors to produce from fields previously reserved for the state. New contract terms will state that any
production increases to currently producing fields will be shared 50-50 between the state and the company.
In addition to the upstream measures, Petroecuador's Gordillo has said he wants more of the country's oil to be sold
directly to end users, instead of the trading companies that now dominate its client list. Traders familiar with
Ecuador's sales strategy say this will remove the risk of manipulation of export prices to benefit the companies with
the contracts.

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